Reserve Bank of India Beats Forecast on Rate Hike

(Article first published as Reserve Bank of India Beats Forecast on Rate Hike on Technorati.)

RBI_logo The Governor of Reserve Bank of India, Duvvuri Subba Rao could not allow himself lagging behind the trend of beating forecast by growth numbers of India. At the quarterly review meeting on Sept 16, 2010, the RBI raised interest rates more aggressively than expected. The RBI lifted repo rate, at which it lends to banks and other financial intermediaries, by 25 basis points to 6 percent. It also lifted reverse repo rate, at which RBI absorbs the cash from the system, by 50 basis points to 5 percent.

Inflation concerns

The deference between the repo rate and reverse repo rate is decreased from 1.25 percent to 1 percent, signalling that the central bank is committed to control the high rate of inflation. "Inflation remains the dominant concern in macroeconomic management," the central bank said in a statement released to reporters. “Monetary Policy Review: September 2010,” almost confirmed that the inflation rates have reached their peak, but cautioned it is likely to remain at unacceptably high levels for some months.

Several factors prompted the central bank to rein in the inflation, which is still nearer to the double-digit figure. Almost double the forecast growth (13.8 percent) of Industrial output in July 2010; rocket speed rise of the share markets; and robust annualized growth rate of GDP (8.8 percent) for the quarter ending with June 2010 necessitated controlling the money supply in the system.

Pause in tightening

Analysts are predicting that this could be a signal for pause in policy tightening pursuit. As the growth side is appearing to be consolidated, the policy makers may now be in pursuit of taming the inflation. However, the Republic of Korea signalled in other direction with its surprise holding of interest rates. Korea might have taken cue from the growing volatility and uncertainty of the global growth.

However, the RBI is optimistic on global growth in its fresh review comparing with July 2010 review in which it expressed concerns on slowing global growth. Now the RBI is happy at the resilience shown by the EU in the face of Sovereign debt pressures. It is appreciative of China bouncing back from the slight slowdown in Q2 of 2010. The RBI’s somewhat positive outlook (not negative, at least) on global economy and domestic growth numbers are not indicative of pause in RBI’s pursuit of taming inflation.

New Base Year

The published wholesale price index (WPI) inflation rate for August 2010 was based on the new series (base year: 2004-05=100) for the first time, the review noted. When the base year is updated with more recent one, the inflation figure automatically is revised downwards.

Instead of increasing the normal level of standards of living, we can decrease the level of the standard itself, which in turns, uplift more people above the normal standards of living. The Indian Government has been following this theory since long back. It is a simple solution for alleviating poverty.

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